Bribery and entrepreneurship: Sam Leone explains

Economists have long been interested in how corruption affects firms, but the existing literature has left a fundamental question unanswered. Does a high perceived bribery rate discourage individuals from starting new businesses? The answer is not obvious.

On the one hand, a bribe could be much more costly than a tax of equivalent value: bribes are traded in secret, so potential entrepreneurs are uncertain about how much money they will end up owing bureaucrats; bribes are also illegal, leaving firms susceptible to hold-up problems in which bureaucrats demand higher and higher payments. On the other hand, bribery could let firms “grease the wheels:” kickbacks can induce bureaucrats to skirt red tape and lower official tax liabilities.